From 1 October 2017, all eligible new employees must be automatically enrolled into a workplace pension scheme. As an employer, it\u2019ll be your responsibility to provide them with one.<\/p>\n
If you\u2019re about to hire your first employee, or still haven\u2019t reached your staging date, then this guide will be able to help you get everything in place. In this blog, we\u2019ll cover:<\/p>\n
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- What to consider when choosing a workplace pension provider<\/li>\n
- How to calculate and make contributions to employee pensions<\/li>\n
- The tax relief you can claim from the government<\/li>\n
- What you need to tell your employees<\/li>\n<\/ul>\n
But, first up, let\u2019s have a quick recap of what Automatic Enrolment is, and why you need to look at providing a workplace pension.<\/p>\n
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What is Automatic Enrolment?<\/u><\/strong><\/h2>\n
You can learn more about Auto Enrolment here<\/a> but, in a nutshell,\u00a0it\u2019s now your legal responsibility to provide a workplace pension to all workers who:<\/p>\n
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- are aged between 22 and the State Pension age<\/li>\n
- earn at least \u00a310,000 a year<\/li>\n
- work in the UK<\/li>\n<\/ul>\n
Why was Auto Enrolment introduced?<\/strong><\/h2>\n
This was introduced by the government to improve pensions saving in the UK. Due to changing living costs and uncertainty surrounding the State Pension, employers and employees are being encouraged to contribute to their own pension and provide for their retirements.<\/p>\n
Related: learn more about the Auto Enrolment responsibilities of small businesses<\/a>.<\/em><\/strong><\/p>\n
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<\/a><\/p>\nHow KashFlow Payroll can help<\/strong><\/h2>\n
Still not up to speed with Auto Enrolment? Don\u2019t worry! KashFlow Payroll offer an end-to-end solution that automatically accesses your employees and enrols them into your chosen pension scheme. It then calculates all contributions, and the setup wizard includes postponement and deferrals. Need to get started? Make Automatic Enrolment easy with KashFlow Payroll.<\/a><\/strong><\/p>\n
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Choosing a pension provider<\/u><\/strong><\/h2>\n
So now you know why you have to provide a workplace pension, let\u2019s look at how you do it. It\u2019s not as difficult as it first seems. The first step is to find a pension provider.<\/p>\n
When looking for a pension provider, keep the following questions in mind:<\/p>\n
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- Will they accept all your staff, with room for future hires?<\/li>\n
- Can you comfortably afford them within your budget?<\/li>\n
- Which is the best method of tax relief for your staff?<\/li>\n
- Does it work with your payroll?<\/li>\n<\/ul>\n
Check whether you can use your scheme for all your staff. Some only accept employers with a certain number of employees, or employees with certain wage levels.<\/p>\n
Check if your scheme is regulated by the Financial Conduct Authority, or has been independently reviewed to confirm they offer a good standard of admin. This is called \u201cmaster trust assurance\u201d.<\/p>\n
All work-based pension schemes need to be registered with HM Revenue and Customers. If the scheme has more than one member, it\u2019ll need to be registered with The Pensions Regulator<\/a> too.<\/p>\n
What type of pension schemes are there?<\/strong><\/h2>\n
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<\/a>There are two main types of workplace pension scheme: defined contribution and defined benefit.<\/p>\nDefined contribution schemes<\/u>, also known as \u201cmoney purchase\u201d or DC schemes, are savings schemes. A pension pot is built up from the employee\u2019s savings, tax relief, and your contributions as an employer. The amount of pension an employee receives depends heavily on how much they and you as an employer contribute.<\/p>\n
Defined benefit schemes<\/u>, also known as \u201csalary-related\u201d or DB schemes, create a pension pot based on an employee\u2019s salary and the length of time they\u2019ve worked for you. This type of pension is more common among larger employers and the public sector.<\/p>\n
You could also adopt a hybrid scheme, which includes elements of both. For tailored advice on which type of pension scheme best suits your business model, get in touch with an accountant<\/a>.<\/p>\n
What criteria does my pension scheme have to meet?<\/strong><\/h2>\n
For your pensions scheme to be eligible for use in Automatic Enrolment, it must meet certain criteria:<\/p>\n
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- Your employees shouldn\u2019t have to do anything to join the scheme<\/li>\n
- Employees shouldn\u2019t have to choose their own investments<\/li>\n
- It must be an occupational or personal pensions scheme<\/li>\n
- It must be tax registered<\/li>\n<\/ul>\n
You pension scheme must also meet certain minimum requirements which vary depending on the type of pension scheme. You can learn more about these specific requirements here<\/a>.<\/p>\n
How much will a pension scheme cost?<\/strong><\/h2>\n
Pension providers charge in different ways. Some may present you with a monthly charge, while others request a one-off payment when the pension is first set up. Remember that your provider may also request an exit fee if you decide to change providers, so shop around and make an informed decision.<\/p>\n
As the final Auto-Enrolment (AE) staging dates approach, pension providers are reaching peak capacity. As a result, some are asking employers to pay joining fees for enrolling employees. This is an extra cost you\u2019ll need to budget for.<\/p>\n
Another thing to keep in mind is that the number of employees your business has could affect the cost of providing a workplace pension. Many pension providers set an annual charge, called a \u201cscheme cost\u201d. The size of this often depends on your number of employees. Generally speaking, more employees will result in a higher scheme cost.<\/p>\n
Some schemes have varying charges depending on their income. This means that lower paid staff pay less for their pension. Often, these charges will be paid by the employee themselves.<\/p>\n
Rather than pursue the cheapest pension provider, take time to consider the cost against the level of service you\u2019ll receive. In the long run, it may prove more cost-effective to pay more for a comprehensive pension solution.<\/p>\n
Budgeting for pension contributions? Get a full view of your finances with KashFlow\u2019s Bookkeeping Software<\/a>.<\/strong><\/p>\n
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Tax relief for workplace pensions<\/u><\/strong><\/h2>\n
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<\/a>As mentioned above, the government provides tax relief towards pension provisions. This means that some of the money from your employee\u2019s pay goes into their pension rather than to the government in tax.<\/p>\nThere are two methods of tax relief: \u201crelief at source\u201d and \u201cnet pay arrangements\u201d. Each affects your lowest and highest paid staff differently. You can only use one method of tax relief in your pension scheme.<\/p>\n
What is \u201crelief at source\u201d tax relief?<\/strong><\/h2>\n
If it\u2019s relief at source, then the pension provider claims the tax relief from HM Revenue & Customs. The contributions are calculated after PAYE tax, National Insurance and other deductions have been made.<\/p>\n
If your staff don\u2019t pay income tax, then they\u2019ll only get tax relief if you use relief at source. If they do pay income tax, but are higher or additional rate taxpayers, then they\u2019ll need to claim their full tax relief using self-assessment<\/a>.<\/p>\n
What is \u201cnet pay arrangements\u201d tax relief?<\/strong><\/h2>\n
If it\u2019s a net pay arrangement, then you need to calculate tax on the pay left after you\u2019ve paid into the pension. As an employer, you need to deduct pension contributions from your employee\u2019s gross pay (before PAYE tax is deducted). This means your employees automatically pay tax relief at their marginal rate.<\/p>\n
If your staff don\u2019t pay income tax, they won\u2019t get tax relief and so will pay 20% more for their pension. In some instances, pension schemes may offer lower member charges to staff if you use a net pay arrangement.<\/p>\n
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Calculating your contributions to workplace pensions<\/span><\/strong><\/h2>\n
Employer contributions to workplace pensions<\/strong><\/h2>\n
The amount you pay will depend on the pension scheme\u2019s rules. However, the employer contributions made must be at the legal minimum as specified in the table below.<\/p>\n
As an employer, you\u2019ll have to provide towards employee pension funds. The below table specifies the amount you\u2019ll have to contribute.<\/p>\n